binve (< 20)

A Massive Chart Dump - P2 Analysis Wrap-Up

0

.... And by "Chart Dump", I don't mean all these charts belong in the toilet :)

So like I said on Friday, I wish Primary 2 was done, I *want* Primary 2 to be done. I just don't think it is done. But I do think it is very close to being done, next week looks very likely for the top.

But the whole point of this post is to look at a whole host of indices, sectors, asset classes, and sentiment indicators to show that there are some very substantial divergences taking place. Some of the "leader indices" show that they have already potentially topped (are not making higher highs with the broader markets). The Dollar and the VIX may have already bottomed. Volume is drying up (or at least substantially declining) in most of the indicies. In short a lot of the signs that we expect to see with Primary Wave 2 have occurred, and things are more or less "on track" for a large trend change in equities.

The other reason for this massive update this weekend is that our first born child is due any day now, and my blogging and chart updates will drop of dramatically next month. binve's life is about to get a lot more interesting :)

This post contains a lot of charts that I show often, but every chart is completely updated with new annotations and analysis. I believe it is a useful post and tells the picture of the markets from a macro view. Enjoy!

Please feel free to comment, disagree, discuss. And even if you don’t agree with my conclusions, please rec if you appreciate the effort or the explanation of my thoughts, even if you use them draw different conclusions than mine.

The binv standard disclaimer:This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ulimately be comfortable with their own investing decisions.

There are several signals that we should see that help to let us know we are at the end of Primary Wave 2. There are some characteristics that Elliott (and then Frost and Prechter later) put forth that would describe some of the technical, fundamental and sentiment aspects of Wave 2. Here are some of those (modified to be bullish, as this Wave 2 is bullish):

From EWP: “Second Waves often retrace so much of Wave one that most of the losses endured are gained back by the time it ends. At this point investors are thoroughly convinced that the bull market is here to stay. Second waves typically end on very low volume and volatility.”

Additionally, bullishness sentiment returns, and is often as high as it was at the peak, despite the technical long term damage that was done by Wave 1.

The SPX looks like it is in the final move of the triple zigzag. We have a smaller converging wedge within a larger converging wedge. And as per my preferred count, I think we have an ending diagonal (another wedge) happening at the end. I will talk about this more in a minute.

Looking at the Daily Chart, we see lots of negative divergence across the board. We see volume declining and the move slowing down at the 1044 resistance level.

It looks like the bulls and bears want to fight it out just a bit more before heading down.

This first chart is the count from last week where I was exploring the possibility and giving some Wave A, B and C comparisons:

Next is the updated version of the count. I think Wave C (final) will be different from Wave C (first) in that the diagonal will not be as drawn out. But that makes sense with the exhaustion that we are seeing at the end of this rally.

I believe the RSI divergence will be greater in this final diagonal

Here is the Ending diagonal count option that Columbia and I are carrying. Mine looks just a little different than his, because I do not believe the C Wave of the diagonal is done yet. C Waves in diagonals are typically the longest (in duration) and the most complex. Again these are guidelines, not rules. But I think based on the bounce off the bottom trendline on Friday, Monday could give us some surprising upward complexity

(Then again, we might get a -300 point "Black Monday" open. P2 could be done as of Friday morning. There is a valid count option there. But read this post as to why I don't have that as my preferred count: So the Diagonal Walks Up to the Two and Says...)

Same count on the NDX

Financials

Next, let's look at a major "canary in the coal mine" sector: Financials. There is still a lot of "un-bullish" developments occurring in financials right now.

XLF is sporting a nearly complete 5 wave for it's final C. And the last wave is also shaping up to be a diagonal.

BKX is hitting its head on major resistance

Goldman-Sucks, errr.. Sachs. This is **very** interesting. GS not only has not been making higher highs like I was observing last week, it is also beginning to break sideways through the wedge support line. GS is undoubtedly the leader of financials, and the fact that it is not making higher highs should be particularly distressing to anybody who is bullish on the sector

BAC "Death Wedge" is still in play. Apex right in the middle of huge long term resistance.

International Equities

As I was discussing last week (A Look At Some of the Asian Markets), many of the Asian markets were the early beneficiaries of inflowing speculative money. They rose the earliest and the fastest. I was also pondering then, would the speculative outflow leave them first? First In First Out (FIFOs for us programming types). It would seem like the speculative MO, move into the most beaten down markets when investor sentiment is at an all time low, ride the wave up, and then bail when everybody thinks we are on the way to new all time highs.

HSI was looking particularly strong up until 3 weeks ago. It has not been making higher highs with the rest of the worlds markets the last 2 weeks. And now it looks as if it is about to start breaking down from the wedge. The Hang Seng is not only tied to China, but it has a huge weighting in Financials. This index is a double-canary (if you will), and should really be on everyone's radar screen.

South Korea is headed right into major resistance.

Shanghai. Wow, what a train wreck. Read the notes on the chart, they tell the story

The German DAX is also sporting a wedge within a wedge. Things are about to come to a head here too.

The NDX is a proxy for the leadership of the US indices. This wedge is also quickly converging.

The SENSEX is another *very* interesting chart. It has rallied like China, huge nearly 100% move off the bottom. But it has already broken down through the wedge support line. Moreover, on a retest, that support line as turned into resistance. Also we see some major RSI divergence showing up on the daily chart. Another canary worth watching.

US Sectors, Assets, and the US Dollar

Watching the sector participation / non-participation has been very interesting. And the last few week there have been some "dissident" sectors. It will be interesting to say how they all behave next week.

Among the major assets classes that drive the US Markets, since the Great Leveraging Event of 2008, we have seen some very strong positive and inverse correlations take place. Here is an excerpt of observations from this post (Market Update - Equities and US Dollar):

Short term is all noise. And the current dollar weakness is fueling the equity rally. Long term, equities will go down (due to poor fundamentals) and the dollar will go down (due to confidence crisis) together (such as 2007-2008 and numerous other occasions)

By and large, there is **far more** positive correlation between the Dollar and Equities than there is inverse correlation. They both go up and down together as evidenced in the chart above.

However, many others including myself, have observed that the "weak dollar" is currently fueling the the equity rally right now. So why the discrepancy?

Because you need to realize that we are still in the aftermath of the Greatest Deleveraging Event in History (2008)!

During the meltdown of 2008, everything was sold / redemeed for the relative "safety" (used exceptionally loosely) of Treasuries: shares in hedge funds, commodities, stocks, etc. As such there was a massive dollar repatriation. The dollar didn't gain value because it was strong! It did because it was "in the way" (you have to buy dollars in order to buy treasuries, it is sort of a necessity that way).

In the ensuing months we have seen the Fed ream bondholders through ever more massive QE salvos, intentionally destroying the "value" of US Treasury debt and the US Dollar. Since that time, money has been moving back out of Treasuries (putting downward pressure on the dollar) and into more speculative endeavors (the stock market). You can see here that there is not a "if the Dollar goes down then Equities must go up" relationship here. Money was leaving treasuries and equities were oversold so they were bought. That's it. Another force at work is the fact that the weak dollar and the oversold nature of equities a few months ago made stocks attractive to relatively stronger foreign currency holders, who could "get more bang for their Euro" so to speak.

You can see that the current inverse relationship between the Dollar and Equities is a product of a very particular setup and is not a given. In fact, the relative valuation of all of these asset classes (Treasuries, Dollar, Foreign Currencies, and US Equities) has shifted a lot the last few months. Anybody expecting this "status-quo" relationship to persist much farther into the future is going to be rudely surprised.

And so the game has been that gold, oil and equities have been positively correlated and Treasuries and the Dollar have been inversely correlated to that group. Now we are beginning to finally see some breakdown of this strong correlation. As this rally gets "long in the tooth", expect to see these asset classes begin to diverge even more.

As I have said just above and many times in the past, I am a long term Dollar Bear. But I think for the end of P2 and the first couple of months of P3, the inverse correlation between the Dollar and Equities will be maintained. But it will be getting weaker and weaker. Eventually they will both head down together. But my 3-6 month forecast is for the dollar to rally.

Sentiment

All sentiment indicators are still reading highly bullish - CHECK!

The VIX still looks like to me that it made a bottom and is consolidating currently in a Wave 2 before the next bigger Wave 3 up.

Fundamentals

I am not going to discuss fundamentals in this post. But they are exceptionally important and I recently put together a huge post that discusses them in great detail: The Long View

Nice post again Binve. Thanks. Glad to see you are highlighting Financials and GS in particular. Indeed GS is the 'canary in the coal mine'. If GS cannot do well as a stock, with all of their unnatural advantages built into the system, then who can?

We need a Neurenberg style Trial before we let these guys off the hook. The resistence to such an event occurring is pretty strong, as you can imagine.

If you put a Gann Fan on the same price movements in weekly, monthly, daily, hourly scales, we are at the exact terminus you are charting here, and observing those lines to the penny. We hit P2 last week and are chopping out the 'blowoff wave' which usually accompanies major pivots in markets. The idea here is to short every spike and be patient. The Bulls will realize the jig is up, just as soon as they are finished laughing at the Bears for being wrong.

All you have to know right now Is that people In the market are willing to take on riskier shares. Not a good omen for things to come.... AIG Is going ballistic,even though the government still owns 80% of the stock. They still have toxics by the Billions on their books,and people are snapping up the shares. In my opinion a very good short In the 50's. I can buy MEDTRONIC,a company that literally prints money,for 38 per share,and AIG Is 50?? How about Fannie and Freddie.... People snapping up those shares as well..... Citigroup, with Billions of toxics still on their books trading tens of billions of shares on a non-stop UP elevator.... Vonage, Etrade, etc etc . I could go on and on.... We are heading back DOWN In a BIg way, and very soon...... http://www.marketoracle.co.uk/Article13078.html

Tastylunch, I am not so sure about that. But just for clarification, once P2 ends and P3 starts, that doesn't mean we begin the "crash" right away. Every impluse (In this case P1, P3 and P5) are themselves made up of 5 waves sequences. So whereas P1 started at the top in Nov 2007, we did get a "crash" until mid-2008. That is because the end of 2007 / beginning of 2008 was spend in waves 1 and 2 of P1. The really big strong move down was Wave 3.

So the same is true for P3. Waves 1 and 2, will be seemling sideways (more down than up), but it won't be "crash" behavior. The next big "crash" will come in Wave 3 of P3 sometime in the middle of next year.

But as for P2, yeah I do think it is close to being done, and yes I do think it will be a definitive top. It may not "look" like a definite top (won't look like a cliff face), but I think we will print the high of the year on most of the US indices, and I think it is very likely it will happen next week.

Thanks bro, I appreciate that man :)

topsecret09, Yeah, the total dollar-volume of what has been driving the indices higher has been comprised of a bunch of stinkers lately. I agree..

binve, sorry about my comment, but to me it seems that you are somehow always one step behind (not ahead) of the market.

Also, for someone who spends so much time analyzing charts, how come you couldn't "see the future" a little better, so that in this CAPS game your rating doesn't suffer so much. I'm not trying to be mean, but I think performance is what counts.

Sorry again if I was (too) mean.

p.s. Congratulations. Babies are great. Wish all the best to the whole family.

Tastylunch, Those are very good points. And you can tell that my Black Monday comment in the original post was mostly in jest. I think / my preferred count is that we are going to get an ending diagonal that should last most of the week.

LOL! yeah, and the flashbacks from mid-late Sept should make people gun shy, I agree. :)

dragonLZ, No worries, if your comment was not meant spitefully then I will not take it that way.

Also, for someone who spends so much time analyzing charts, how come you couldn't "see the future" a little better, so that in this CAPS game your rating doesn't suffer so much.

Fair point and a fair question.

I did not long 100% at the bottom (miners and energy mostly, but some broad market too). In real life: I went long miners in Nov-Dec and then long oil in Jan and then long equities in March. I made excellent profits. And you can see from my Caps picks around those same time frames, which are very similar, I also did well.

But I always considered this to be a bear market rally and I was, very openly and admitedly, much too early on my bearish calls. And even though I still believe this is a secular bear market and the cyclical trend is about to align with the secular trend soon, the fact that I called that trend change so early means I was wrong.

My preferred count months ago was for a very large zigzag, that would have played into the Head and Shoulders setup in June July. In short I was thinking and betting we would get a signifcant pullback in equities before making higher highs. Again I was wrong.

Other people were analyzing the whole rally correctly from the beginning. I had a different opinion and it turned out to be wrong. Part of the game. I take my losses, learn my lessons and move on.

Am I wrong about the call that we are near the end of P2? Maybe. But it is what I think, and I share my thoughts. I have no ego to defend. And if I am wrong about this call, I will admit it like I have in the past with all my wrong calls, and move on.

Thanks for the congrats on the babies. I appreciate that! Yeah, we are very excited :).

Yeah I've been waiting for the market to vomit all over itself for about 7 weeks now

Beautiful!!

Very similar to my statements such as:

There have been a lot of band-aids applied. And even to an open festering wound a band-aid will apply some "relative" amount of relief (vs. doing nothing) in the *very short term*. But if you have a severed carotid artery and you put on a band-aid, it will soak up excess blood for a couple of seconds, before that band-aid becomes saturated and is no longer effective. The stimulus has stopped the free fall in a number of economics indicator "bleed-outs", but have they "fixed" anything?

and

Monetization has been an overused band-aid, and is now saturated with the dripping puss from the economy (sorry to be so graphic). The is done to avoid short term pain, but is destroying the value of the US Dollar

As always - i'm a little leary of any mathematical model or statistical analysis applied to predict the stock market. If it were so easy wouldn't some geniuses from MIT have made a fortune in the stock market already? They are better off going to Vegas - the odds are better. (anybody see the MIT blackjack team?).

I think even the biggest bulls are expecting some kind of pullback here. (Jim Cramer recccomended taking some money off the table now) Lets see what happens when the traders come back from vacation after labor day.

There is a guy called "Market Whisperer" (if you haven't heard of him, you will soon), who so far predicted:

- On 7/13/09 he said the second leg of the rally has started (market is up ever since and that indeed was a first day the market started going up after the slight correction that started Mid-June).

-On 7/27/09 he said we are in a new bull market that's going to be huge.

- On 7/28/09 he said market will continue to go up for another 2-3 weeks before a short, but steep correction in Mid-August (that was a rather bold call, as at that time 100% of the bears were saying market will collapse and 90% of the bulls were saying it's time for a correction. Market continued to go up just as he predicted).

- On 8/14/09 right before the end of the 3rd week since his previous prediction, he said he changed his mind about the correction. He said there will be none in August, and that the market will continue to go up for at least 8 more weeks. (So far, he was right. There is 6 more weeks left for the market to prove him wrong - or right.)

- On 8/17/09, on a day when DOW was down 186 points, he said: Market will be up tomorrow (Another bold prediction as majority of people said: This is it, the start of a correction. Market Whisperer was right, market was up more than 1% the next day (and it has been going up ever since, pretty much).

Now, what's interesting, these are the only predictions he has made. It's not like he's making them every day so he has to be right sometimes... No, these are his only predictions so far and they have been well documented.

I'm mentioning this guy as he is also a "chart guy", but it looks to me that he seems to have a better track record than binve (or anyone else that I know of).

He says: Even though 95% of my trades are based solely on charts, I've never looked at Moving Averages, Resistance Points, never drew any lines, never looked at any shapes, no P1's, no P2's... I just listen very carefully to what the market is telling me...

Port... I realize there was a reverse split,but that does not change the fact that a (at that time) you would be shelling out 5400.00 for 100 shares In a highly questionable company,or spending 3800.00 for 100 shares of Medtronic that will probably be 80.00 to 100.00 per share In 3 years.... AIG was 80 cents for a while, 1 for 20 gives you 16.00. Frankly I wouldn't give you 16 cents for AIG.... TS

Big Daddy Binve! I'm guessing the protracted silence means that day has come. Congrats, ese! Being a dad is great (I'm a father for 2.5 years, now with 2!) Tonight I toast you and yours by cracking an IPA (typically the other end of the specturm from my taste, I like the darker ones, but I read you like em hoppy. Ever tried Hazed and Infused, from Boulder Brewery? kinda the best of both worlds, IMHO)

Thanks as always for the great material. I was wondering, when you get back, if you have a chance, could you expound a bit on the BOFA "wedge of death", for us chart rookies...

Right now, there are only 808 portfolios better than dragonLZ's, and I don't think many of them can say they were created as late as dragonLZ's (created at the beginning of June). I think that's quite an accomplishment.

MarketWhisperer's portfolio was created last day of August, and as you probably know, the market didn't really have a great run since then (3% is my guess). However, MW's portfolio is already better than 92% of other portfolio's. I think that's pretty good.

I also think that you should definitely check out MW's profile. I think he might be onto something. I'm sure you will also like his list of favorite players :)

And, you know what I think? Both of these portfolios will be among the top 50 (maybe even top10) portfolios sooner rather than later. I'm not going to give you any time frame, but I know it will happen. Also, a lot of stocks you think are garbage, will be 10-baggers by then.

How do I know?

They don't call me Market Whisperer for nothing... :)

p.s. Have you seen my STRONG BUY rec on SEH, SAH, TEN, and ARM, and my BUY rec on PNX. I'm positive all of these will have 30-50% gains in 45 days or less. Will I be right? They don't call me...